Now is everything you are doing from the Editor affecting the .sco only. If you generate a terrain and then shape it completely different in the editor, Im assuming it all goes in the .sco right.

So what is the scene code useful for other than selectin the outer_terrain & its size? The actual hills, rivers, and stuff are not fixed to the code are they.

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I generated a fairly flat terrain - but it turned out to be too big for nothing. I want to reduce it. What should I do, should I re-generate a smaller land - or is that gonna mess up my work on the sco.

The scene code is the template which the SCO builds on. If you alter the code it will affect the sco as well. To see that in action, just swap out a scene code from another map with one you are working on and your terrain will be all messed up.

As for your final question, it would depend on elevation I would say. Since the hills and crags might be slightly different it would probably affect the current SCO as well. A simple solution would be to not fill in the outer areas of the map and then simply put in barriers so players cannot access those outer areas.